CHALLENGES TO FULL-SCALE ADOPTION OF BLOCKCHAIN IN INDIA

With more than 30,000 blockchain innovators and practitioners across India, blockchain technology has emerged as a transformative source of innovation and disruption. The technology has been widely recognised across the world and more so for its applications related to governance in the public domain. The core features of blockchain such as providing transparency and a platform for auditability in governance are the reasons for the technology gaining wider acceptance both within the public and the private sector.

As per a recent report on “National Strategy on Blockchain, 2021” by the Ministry of Electronics and Information Technology (MeitY), Government of India, potential blockchain applications of high interest to the nation include farm insurance, transfer of land record, identity management, pharmaceutical supply chain, duty payments, power distribution, e-notary service, e-voting, agriculture and other supply chains, digital certificate management, IoT device management and security, public service delivery, digital evidence management system, electronic health record management, and microfinance for self-help groups.

Some of the global efforts by countries to embrace and promote blockchain technology include the Blockchain-based Service Network (BSN) initiative of China that provides developer tools with a focus on standardization across public networks, the European Blockchain Partnership for developing a secure and resilient European Blockchain Services Infrastructure (EBSI), the Smart Dubai initiative by the UAE for becoming the “first city fully powered by Blockchain by 2021”, the UK’s food standard agency deploying blockchain for tracking the distribution of meat, the USA’s food and drug inspection authority deploying the technology in health data processing for a transparent supply chain, Brazil using the Ethereum network for eVoting, and Switzerland using the same for digital IDs.

Although blockchain has grown immensely and large corporations and the government in India are deploying the technology for several use-cases, there are numerous challenges. The major technological challenges are related to scalability and interoperability issues. Security and privacy of sensitive data are a major concern that hinders its growth, which is exacerbated by a lack of awareness, education, and skill set among its users.

One of the features of blockchain technology is that the data stored on the chain is recorded on every node on the network, making it difficult to maintain the privacy of data required as per the data protection laws such as Section 43A of the IT Act. Extensive research and development are being carried out in providing solutions to align with data protection laws and to protect the privacy of the users. Different forms of blockchain such as permissioned and private blockchain also exist to control the level of privacy in different elements of the data recorded. The “Right To Be Forgotten’, a prominent feature of the Draft Personal Data Protection Bill, 2019, cannot be satisfied due to the inherent core functionalities of blockchain which include a permanent record of data and accessibility of transaction history.

Privacy concerns around data ownership and sharing are ever-growing. Blockchain can be designed to be either public, private, consortium or hybrid. But, it is crucial to direct and design what part of the data remains on-chain and off-chain to avoid sensitive data of stakeholders involved in a transaction being exposed. For achieving higher interoperability across similar applications, it is imperative to create data standardization and process standardization across similar applications.

One of the major applications of blockchain is in the supply chain industry but there is a lot of resistance by domain experts to deploy the technology due to trust issues, lack of infrastructure, or simply a lack of understanding of the technology itself. Many blockchain platforms exist today but a lack of understanding of their core functionalities and how they can function together remains a major hurdle for higher blockchain adaptability. It is crucial to educate and spread awareness of different functionalities of blockchain such as security, flexibility, scalability, etc. of open source blockchain platforms. Blockchain can be deployed in several industries and provide solutions to many use-cases. However, continuous production deployment can be only achieved if users are made aware of how the technology provides solutions to a specific domain.

As more and more people are connected to the blockchain network, the processing speed can significantly decrease since copies of the blockchain are maintained on each node every time a new transaction is added to the block. Its decentralised architecture can be slower than traditional systems, thus, there is a need to work upon a system upgrade that will allow faster synchronisation of transactions if more people are to be connected to the blockchain.

The data storage mechanism of blockchain is “append-only” which means it cannot be modified, replicating on the nodes and this demands higher storage capacity. As more blocks are added to the chain, the issue of scalability becomes more relevant. Scalability is a major roadblock in the full adoption of technology due to factors such as the configuration of the blockchain platform, consensus mechanism, block size, network bandwidth, processing power requirements, privacy requirements, architecture, and data storage. These factors can be addressed by improving the design architecture of its network and platform.

Since blockchain is distributed in nature, allocating resources to the network and node infrastructure varies and depends on the cost of maintaining the network, its security, and other essential requirements. Optimum allocation of resources is needed as lower resource allocation in such cases could highly affect the performance of the entire system.

Cryptocurrency mining uses consensus mechanisms such as proof of concept which requires the expertise of data scientists, making its adoption rather difficult. A combination of domain and technology expertise is a rare skill set to find and a lot of blockchain projects remain unsuccessful and incomplete due to resource constraints. If the skill set is not acquired timely, India could fall behind in the complete adoption of blockchain and remain unsuccessful as compared to the rest of the world.

Banking regulations require non-repudiation via in-person verification which is difficult due to challenges in implementing technological solutions to blockchain-based cryptocurrencies. Due to the lack of details regarding digital signatures, which is a core part of the blockchain, in Schedule I of the Information Technology Act, 2000, for transactions related to wills and negotiable instruments, immovable properties, etc., the application of the technology becomes difficult.

Since every entity in the network including the user and the node owns a private key, public key, and certificates, it is imperative to use Certificate Authority (CA) to maintain the privacy of data. Depending upon the nature of the targeted application, the choice of CA can be determined, and licensed CA could be used for transactions requiring signing using certificates.

Decentralized finance (DeFi) is poised to expand in India, providing opportunities for the unbanked and underbanked population of the country. DeFi provides financial services through a decentralised network and provides use cases such as cross-border remittances. As per a study by the World Bank, the average transaction fee is 7.45 percent, even for cross-border remittances in India, with traditional banks charging even higher fees. By embracing DeFi, such charges can be as low as 0.5 percent or even lower, benefitting millions of Indians transferring money to India.

But the state of regulations and compliance for blockchain and especially cryptocurrencies is still ambiguous in India. Currently, there are speculations that the Government of India is to introduce a bill in the Parliament to ban cryptocurrency transactions in India. The concerns are fuelled by the existence of money laundering activities that can be exacerbated through the usage of cryptocurrencies. However, it should be noted that due to its decentralised nature, the solution does not reside in banning the industry but in imposing tighter regulations and through increased taxation.

The Government of India is also talking about introducing its own central bank digital currency (CBDC) and there are many advantages to it. CBDC makes tax evasion more difficult and allows higher monitoring of illicit activities. It allows disruption of banks and clearing houses, also limiting the guarantee that is required to be provided by commercial banks. It becomes easier to monitor monetary policy, allowing for a direct control of the money supply and for using tools such as helicopter money, and also makes privately controlled money systems more transparent and secure. By providing low-cost bank accounts, CBDC provides higher financial inclusion to every citizen of the country. However, it should be noted that CBDC should exist in harmony with other cryptocurrencies to reap the full benefits of the technology.

In a nutshell, the adoption of the technology in India would accelerate when the regulations are well-defined by the Government of India, more awareness and training is provided for the required skill set in the industry, more universities and corporations offer courses and practical training to improve existing blockchain architecture and systems for battling scalability, privacy and security concerns around the technology.

Dr Badri Narayanan is the founding director of Infinite Sum Modelling, Seattle and a senior economist with University of Washington, Seattle. Pankhuri is an economist and serves as a Blockchain Expert at the United Nations and International Standard Organization (ISO). The views expressed are personal.

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